IP: Discoverability of settlement negotiations

The Federal Circuit Court of Appeals’ April 9 opinion in In re MSTG, Inc. has parties to patent license agreements thumbing through their files to see what exactly was said in the settlement negotiations that led to those licenses. In In re MSTG, the Federal Circuit addressed a petition for a writ of mandamus brought by a patent holder that had been ordered by the district court to produce to AT&T, an accused infringer, all communications the patent holder had with six companies that had previously taken licenses.

In two separate actions, MSTG had charged AT&T and several other mobile service providers and mobile phone manufacturers with infringing its patents related to 3G technology. Except for AT&T, all defendants settled and took licenses to the patents-in-suit and other MSTG patents. MSTG produced the licenses to AT&T, but refused to produce communications between MSTG and the licensees.

In his report, MSTG’s damages expert opined that those license agreements were not comparable to the MSTG/AT&T hypothetical negotiation, specifically relying on the deposition testimony of a MSTG executive that the agreements, and the royalty rates therein, were borne solely from litigation.

The district court ordered MSTG to produce all documents reflecting communications with the existing licensees, including settlement negotiations. The court found it would be improper to allow MSTG’s damages expert to rely on the reasons for the agreement articulated by the MSTG executive, and at the same time withhold from discovery communications between MSTG and the licensees that might contradict those reasons. In its petition, MSTG asked the Federal Circuit to adopt a settlement negotiation privilege and reverse the lower court’s order.

Prior to the Federal Circuit’s April 9 opinion, there had been a split in the district courts on the discoverability of communications surrounding settlement negotiations. The Federal Circuit resolved that split, holding that “settlement negotiations related to reasonable royalties and damages calculations are not protected by a settlement negotiation privilege.”

Federal Rule of Evidence 408 provides that statements made during settlement negotiations are not admissible “to prove or disprove the validity or amount of a disputed claim or to impeach by a prior inconsistent statement or a contradiction.” But the Rule explicitly provides that such evidence is admissible for other purposes. And Rule 408 addresses only the admissibility of these communications. It does not bar their discovery. This fact was one of the factors that weighed against adoption of a settlement negotiation privilege.

The Federal Circuit stopped short of holding that all communications related to settlement negotiations are presumptively discoverable. In fact, the court “reserve[d] for another day the issue of what limits can appropriately be placed on discovery of settlement negotiations.”

The court hinted at some situations in which certain evidence would be discoverable. “For example, settlement negotiation evidence would be admissible where the settlement itself or its interpretation is at issue or where evidence of the ingredients of the settlement might be relevant to an issue of double recovery.”

Evidence related to MSTG’s negotiations was discoverable because the expert had opined that the amount paid to MSTG had been significantly discounted because the agreements were entered into before any major rulings in the litigations.

“MSTG cannot at one and the same time have its expert rely on information about the settlement negotiations and deny discovery as to those same negotiations.”

The court also pointed out that, where evidence is explicitly admissible under Rule 408, that evidence will also, of course, be discoverable.

However, the Federal Circuit seemed to endorse a district court’s prerogative to impose limitations on the discoverability of settlement negotiations and to require that a party seeking disclosure of such evidence meet a heightened standard. The court noted that “the district court has discretion to limit discovery of material that is not itself admissible and that was not utilized by the opposing party to protect settlement confidentiality.”

So where a party relies only on the four corners of a license agreement in arguing for the relevance or irrelevance of that agreement, perhaps documents reflecting the negotiations leading up to the agreement will not be discoverable.

The court also pointed out the heightened standard the 2nd Circuit imposed with respect to discovery of confidential mediation communications, and the heightened standard that several district courts imposed with respect to discovery of settlement negotiations. Essentially, these courts require that the party seeking disclosure of these confidential communications demonstrate a “special need” for the evidence or provide a “heightened, more particularized showing of relevance.”

While In re MSTG should not have the effect of making all settlement negotiation evidence discoverable all of the time, the Federal Circuit has made clear that such evidence is not presumptively off-limits. The Federal Circuit has “reserve[d] for another day” the issue of what specific limits should be imposed on the discoverability of settlement negotiations.

In the meantime, parties to such negotiations should operate with the understanding that they are now more likely to have to produce their letters, e-mails and other communications that reflect the negotiations.